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Friday, 25 February 2011

United’s Q2 2011 results: running on one engine

Red Football Limited reported figures for the three months to 31st December this morning. The media will probably focus on the following statement:

“The Board notes recent press speculation regarding a possible bid for Manchester United. The Owners remain fully committed to their long-term ownership of the club. No discussions have taken place, Manchester United is not for sale and the Owners will not entertain any offers.”

So “United, United, not for sale” remains the mantra. I’ll let readers make up their own minds about that....

Results overview

These were solid figures, United’s money machine is actually quite a predictable beast (as long as we qualify for the Champions League each year).

Revenue

Revenues rose 7.1% in Q2 vs. last year, all driven by the Commercial side of the business. Matchday income was down 1% despite the club playing exactly the same number of home games as last season (10). This was driven by a tiny dip in average attendances from 72,862 to 71,851 (the Wolves Carling Cup game was not a big draw).

Media income rose 0.5% in the quarter. United (like all PL clubs) benefit from the new international rights deal this season, but received less CL income as a consequence of finishing 2nd in the league last year vs. 1st the year before. The eventual outturn for the year will depend obviously on how far we progress in Europe and whether we win the league...

The “star” was again the commercial operation. Revenue was up by a third vs. last year at £25.5m for the quarter. The rise of £6.3m on 2009/10 splits roughly; £1.5m extra from Aon compared to AIG, £0.7m extra from Nike and £4.1m from the plethora of “partners” signed up in recent years (DHL and Epson being recent examples). The big question of course is how much further the club can push these “partnerships” in the future. Can £15-20m continue to be added each year or will the growth flatten out?

Costs

Endemic cost inflation remains the bane of football. The cost growth in Q2 was actually lower (7%) than in Q1 (15%), which may be due to the timing of bonuses. Over the first six months of the financial year, United’s wage bill rose 10%.

Other operating expenses rose 22%, which the club blamed on (non-staff) expenditure “largely associated with the Company’s commercial and media business”. A £3m rise in these items year on year is pretty large, and may reflect commissions paid to acquire commercial partners. In aggregate, costs are growing slightly faster than income.

Profits, transfers and investment

EBITDA (“earnings before interest tax and amortisation”) growth remains subdued and does not (as I wrote in the Guardian this morning) justify a very high valuation. EBITDA in Q2 rose 2.8% and over the first six months of the year 3.2%. It is striking that very fast revenue growth from the commercial arm is unable to drive any real profit growth.

The club spent £1.3m in Q2 on capital expenditure at Old Trafford (further development of the executive boxes in the North and East stands).

The second quarter of the year is very working capital negative as prepayments unwind. There was a seasonal working capital cash outflow of £31.8m, to leave operating cash flow for the quarter at £12.7m. Bond interest is paid in February and August so there was no payment in this quarter’s numbers. Deducting the investment described above, the club saw a cash inflow of £7m.

During Q2 Red Football bought in (but did not cancel) £24m of the sterling bonds. With cash sitting in the bank earning c. 1%, and bonds costing 8.5%+, this is obviously a sensible bit of housekeeping. The buyback and a small fall in the pound vs. the dollar left the company with £489.4m of gross debt. On the asset side, the club has £134.5m of cash in the bank. Regular readers will know that this is effectively the money received from selling Ronaldo in 2009 (£80m) and the pre-payment of the Aon sponsorship in 2009 (£35.9m) and the cash in the bank at the end of 2007/08 prior to these events. These windfalls remain unspent.

On the conference call with bond investors, Ed Woodward (“Chief of Staff” and architect of United’s financial plan) explained that having such an unusually large amount of money in the bank was to ensure “flexibility”. People like me think that the money is earmarked to be paid out of the club in dividends at some future point (there seems no financial logic for sitting on it). Woodward reiterated however that there are “no plans” to pay dividends.

There was (unsurprisingly) no comment on the PIK repayment in November or the move of the holding company to Delaware. These are matters outside the scope of these results. No explanation of where the Glazers suddenly found £249.1m to repay the PIKs has been forthcoming of course.

Thoughts

United as a business is in good shape. The club will (barring a calamity on the pitch) makes £105m+ of EBITDA in the current year. That places it in a league of one in European football. Pre-transfer cash flow will be less strong as interest, swap loss payments and working capital outflows impact, but the club will be cash positive.

From a growth point of view however United is like a plane running on only one functioning engine; commercial partnerships. Between 2006 and 2010, largely through ticket price increases, matchday revenue rose 9.4% per annum, it is now not growing at all. Over the same period, media income rose a staggering 23% per annum, it is now growing 1-2%. Everything rests on commercial partnerships. None of this is particularly gloomy as the club already makes so much money, but what it does show is that future growth is going to be very hard to find.

Meanwhile the great “cash mystery” remains. Why issue expensive bonds at 8.5% interest whilst keeping so much money in the bank? Why has there been so little transfer spending by the serial smasher of British transfer records? Where did the PIK repayment money come from? Woodward claims the money in the bank is there to provide “flexibility”, but the club was happy to run with an average cash balance of £45m between 2005 and 2008. Now £135m is seen as prudent, far in excess of what any football club anywhere has needed before. Why the sudden change?